by Brad Stone
It was an enormous tactical blunder. Barnes & Noble would have to scamper to meet Amazon’s challenge in the e-book market. It would follow a very similar blueprint, setting up a development office in Northern California as Amazon had done with Lab126. Ironically, to design the device, the retailer hired Robert Brunner, the former Apple designer who had left Pentagram to start his own agency, Ammunition. Brunner and his employees had battled with Bezos over putting a keyboard on the Kindle, so, perhaps not surprisingly, the new B&N device—dubbed the Nook—would leave out the keyboard in favor of a separate touch-based control pad, and its advertising would sport the tagline “Books don’t have buttons.”
The Kindle wasn’t an overnight success, of course, but an avalanche of publicity and its prominent placement at the top of the Amazon website ensured that the company would quickly run through its stock of devices. Steve Kessel had studied the introductions of similar consumer electronics like the iPod and placed a conservative first order of twenty-five thousand units. The original batch sold out in hours. Amazon then discovered that the development of the Kindle had gone on for so long, one of its Taiwanese suppliers had discontinued a key component in the wireless module. The company spent months getting a replacement. When a new batch of Kindles arrived the following fall, Bezos appeared on Oprah Winfrey’s talk show, and that blew out the supply once again. “When we originally made the first manufacturing capacity for the Kindle one, we thought we were being very optimistic,” Bezos said. “It was just bad planning.”14
The shortage led to some internal friction. Even after the device sold out, Bezos wanted to promote it heavily on the Amazon home page to continue educating customers and building the brand. Jeff Wilke, now head of North American retail, thought it was irresponsible to feature a product that wasn’t available, and also a waste of Amazon’s most precious real estate. Angry e-mails over the issue one day turned into a heated conversation in Bezos’s office. “We were both passionate and within five minutes we were both mad,” says Wilke, who later conceded that Bezos was right and the short-term pain had been worth it to build the Kindle franchise. Bezos won the argument, of course, but Wilke convinced him to at least make it clearer on the site that Amazon did not actually have any Kindles on hand.
Just as Clayton Christensen had predicted in The Innovator’s Dilemma, technological innovation caused wrenching pain to the company and the broader industry. No one was feeling it more than the book publishers. Amazon had spent much of the last two years cajoling and threatening them to embrace its new digital format. But in all those conversations, the company had clearly withheld a crucial detail that Bezos divulged seventeen minutes into the forty-minute launch speech. “New York Times bestsellers and new releases are only nine dollars and ninety-nine cents,” Bezos said almost halfway through his presentation at the W Hotel.
Among the gathered publishing execs at the Kindle press conference, there was confusion. Was the $9.99 price a promotional discount for the launch? Was it only for bestsellers? Even after the event, Amazon executives told their publishing counterparts they didn’t know or couldn’t say. Soon it was clear to the bookselling industry that the flat price was not transitory at all—Amazon was pushing it as a new standard. Bezos went on a media tour after the Kindle event, appearing on programs like The Charlie Rose Show, trumpeting the $9.99 price for new releases and bestsellers and making a persuasive case for change in the book business. “It is not written anywhere that books shall forever be printed on dead trees,” he told Rose.
Finally the grim reality sank in, and publishing executives kicked themselves for their own gullibility. “It left an incredibly bad taste in our mouths, that they would slip that one by us after hammering us for months and months with their goddamn lists,” says one executive of a major publishing house. “I don’t think they were doing the wrong thing, but I think the way they handled it was wrong. It was just one more nail in the coffin that no one realized was being closed over [us], even while we were engaged every single day in a conversation about it.”
“I think we were absolutely naïve in agreeing to supply those files without any caveats around them,” says another executive at a big-six publisher, one of the six trade houses with the largest market shares. “If I could rewrite history I would have said, ‘Thanks so much, I love the idea of the Kindle, but let’s have an agreement that says you will not sell below the cost.’ I feel like I was asleep at the tiller.”
The new low price for top-selling e-books changed everything. It tilted the playing field in the direction of digital, putting additional pressure on physical retailers, threatening independent bookstores, and giving Amazon even more market power. The publishers had seen over many years what Amazon did with this kind of additional leverage. It exacted more concessions and passed the savings on to customers in the form of lower prices and shipping discounts, which helped it amass even greater market share—and more negotiating leverage. All this would take a few years to sink in, but it became widely understood when the Kindle started gaining real momentum with the introduction of the Kindle 2 in early 2009. The gazelles were wounded, the cheetah was on the loose, and the subsequent high-profile business and legal dramas would shake the book industry to its foundation.
Amazon had grown from a beleaguered dot-com survivor battered by the vicissitudes in the stock market into a diversified company whose products and principles had an impact on local communities, national economies, and the marketplace of ideas. Like all powerful companies, it would now be subject to ongoing scrutiny of its corporate character, a perpetual test of not only how well it served its customers but also how well it treated all of the parties drafted into its whirling ecosystem, including employees, partners, and governments. The development of Fiona set the stage for this new phase in Amazon’s history and revealed the company as relentlessly innovative and disruptive, as well as calculating and ruthless. Amazon’s behavior was a manifestation of Bezos’s own competitive personality and boundless intellect, writ large on the business landscape.
PART III
Missionary or Mercenary?
CHAPTER 9
Liftoff!
The fulfillment center dubbed Phoenix 3 on the east side of Arizona’s largest city assaults the senses. It’s the physical manifestation of the everything store, a vision that most Amazon customers could never even imagine and will never behold: a 605,000-square-foot temple to the twin gods of efficiency and selection. Products are neatly arranged but seemingly randomly stowed on shelves. Star Wars action figures sit next to sleeping bags; bagel chips next to Xbox video games. In one high-risk-valuables area, monitored by overhead video cameras, a single Impulse Jack Rabbit sex toy is wedged between a Rosetta Stone Spanish CD and an iPod Nano. Amazon stocks dissimilar products next to one another to minimize the possibility of employees selecting the wrong item, but that seems unlikely to happen. Every product, shelving unit, forklift, roller cart, and employee badge has a bar code, and invisible algorithms calculate the most efficient paths for workers through the facility.
The aisles of Phoenix 3 are a bustling hive of activity, yet the cavernous space feels quiet. The prevailing sounds come from 102 humming rooftop air conditioners and a chorus of beeping electric carts. One employee manages to project his voice through this acoustic dead zone. Terry Jones, an inbound support associate making twelve dollars an hour, pushes a cart through aisles with towering stacks of products on each side and shouts his arrival in honeyed tones to everyone in his way: “Cart coming through. Yu-up! Watch yourself, please!”
Jones says he is making his time at Amazon “joyful and fun” while complying with the company’s rigorous safety rules. And those same warnings could have been shouted to the world’s retailers in 2007: Amazon was coming for them.
Wall Street analysts first began to notice changes in the company’s financial numbers early that year. Amazon’s sales were accelerating while third-party sellers were reporting a surge of activity on the site and a c
orresponding decrease on rival platforms like eBay. Curiously, Amazon’s inventory levels were growing too. The company was keeping more merchandise in places like Phoenix 3, as if it confidently expected customers to start buying more.
Scott Devitt, then an analyst for the investment bank Stifel Nicolaus, spotted these shifts earlier than most and upgraded the stock from hold to buy in January 2007.1 He changed his rating on the same day a Merrill Lynch adviser offered the far more conventional analysis that Amazon’s margins were hopeless and that it could not make any money. “I was laughed out of portfolio managers’ offices,” Devitt says. “People were ripping apart every component of my investment thesis. At that point, they thought Amazon was some kind of nonprofit scam.”
Inside Amazon, the pain endured over the previous seven years was paying off. Prime, the two-day shipping service, was an engine spinning the company’s flywheel ever faster. Amazon customers who joined Prime doubled, on average, their spending on the site, according to a person familiar with the company’s internal finances at the time. A Prime member was like a shopper who walked into a Costco warehouse for a case of beer and walked out with the beer plus an armful of DVDs, a nine-pound smoked ham, and a flat-screen television.
Prime members bought more products across more categories, which in turn convinced sellers to let Amazon stock their merchandise and ship their orders from its fulfillment centers, since that meant their products qualified for Prime two-day shipping. Amazon was enjoying what analysts call operating leverage—it was getting more out of its assets, and its famously microscopic profit margins started to expand. (Although that was temporary—they would shrink again a few years later when Bezos started investing in new areas like tablets and streaming video.)
All of this became dramatically visible to the wider world for the first time on April 24, 2007, when Amazon announced surprisingly strong results from its first quarter. Quarterly sales topped $3 billion for the first time—a 32 percent jump in a year, well above its previously consistent 20-something percent annual growth rate and the 12 percent annual growth rate for the rest of e-commerce. That meant Amazon was stealing customers from other Internet players and likely even from the offline chains. During 2007, as investors came to understand the salubrious effects of Prime, Amazon’s stock jumped 240 percent—only to fall all the way back down again in the ensuing financial crisis and global recession.
At the same time that Amazon’s flywheel was accelerating, eBay’s was flying apart. The appeal of online auctions had faded; a customer wanted the convenience and certainty of a quickly completed purchase, not a seven-day waiting period to see if his aggressively low bid for a set of Cobra golf clubs had won the day.
But eBay’s problems went beyond the overripening of the auctions format. Amazon and eBay had taken diametrically opposite paths. Amazon endured the pain of disrupting its own retail business with its eBay-like Amazon Marketplace, which allowed third-party sellers to list their products on the company’s single-detail pages; eBay, which had started as a third-party auctions platform, recognized that many of its customers wanted a more Amazon-like fixed-price alternative but failed to self-administer the necessary bitter medicine in a single dose. It spent two years working on a separate destination for fixed-price retail, called eBay Express, which got no traffic when it debuted in 2006 and was quickly shut down. Only then did eBay finally commit to allowing fixed-price sales to share space alongside auctions on the site and in search results on eBay.com.2
Meanwhile, Amazon invested heavily in technology, taking aggressive swings with digital initiatives like the Kindle. Amazon also focused on fixing and improving the efficiency of its fulfillment centers. EBay executives searched for high-growth businesses elsewhere, acquiring the calling service Skype in 2005, the online-ticketing site StubHub in 2007, and a series of classified-advertising websites. But it let its primary site wither. Customers became happier over time with the shopping experience on Amazon and progressively more disgruntled with the challenges of finding items on eBay and dealing with sellers who overcharged for shipping. Amazon had battled and mastered chaos; eBay was engulfed by it.
In 2008 Meg Whitman passed eBay’s reins to John Donahoe, a tall and gracious onetime Dartmouth College basketball player and a former consultant for Bain and Company. One of Donahoe’s first trips in his new capacity was to Seattle, where he went to pay a courtesy visit to Bezos at Amazon’s headquarters. The executives talked about innovation, hiring, and how they got enough exercise and dealt with stress. Bezos was now working out regularly and was on a strict lean-protein diet.
At the meeting, Donahoe paid his respects to the e-commerce pioneer. “I am always going to be less cool than you,” he told Bezos. “I have huge admiration for what you’ve done.” Bezos said that he did not view Amazon and eBay as fighting a winner-take-all battle. “Our job is to grow the e-commerce pie and if we do that there is going to be room for five Amazons and five eBays,” Bezos said. “I’ve never said a negative thing about eBay and I never will. I don’t want anyone to view this as a zero-sum game.”
That year, eBay’s stock lost over half its market value, and in July, Amazon’s valuation surpassed eBay’s for the first time in nearly a decade. Bezos had now accomplished many of his early goals, like turning Amazon into the primary storefront on the Web. The website was selling more kinds of things—and just generally selling more things—than ever before. Amazon reported $14.8 billion in sales in 2007, which was more than two of its earliest foes combined could boast: Barnes & Noble pulled in $5.4 billion that year, and eBay $7.7 billion.
That meant nothing, of course. Despite the teeming abundance of merchandise at Phoenix 3, Bezos still saw broad gaps in Amazon’s product lineup. “In order to be a two-hundred-billion-dollar company, we’ve got to learn how to sell clothes and food,” Bezos said frequently to colleagues during this time. That figure was not randomly selected; it referred to the magnitude of Walmart’s sales in the middle years of the decade. To lead the new foray into consumable goods, Bezos hired Doug Herrington, a former executive at Webvan, the failed grocery-delivery business from the dot-com boom. After two years of work, Herrington’s group started testing Amazon Fresh, a grocery-delivery service in Amazon’s hometown of Seattle.
At the same time that Bezos hired Herrington, he brought in veteran apparel executive Steven Goldsmith and acquired the luxury-goods website Shopbop to help Amazon learn the byzantine ways of the clothing business. Along with Goldsmith, Russ Grandinetti, as head of hard-lines, would lead the renewed charge into apparel.
In the midst of yet another retail expansion at Amazon, Bezos seemed to be trying to modulate his management style and keep his notoriously eviscerating assessments of employees in check. It was said he had hired a leadership coach, though the identity of this counselor was a closely guarded secret. “You could see the fact that he was getting feedback and taking it seriously,” says Diane Lye, then the director of infrastructure automation. During one memorable meeting, Bezos reprimanded Lye and her colleagues in his customarily devastating way, telling them they were stupid and saying they should “come back in a week when you figure out what you’re doing.” Then he walked a few steps, froze in midstride as if something had suddenly occurred to him, wheeled around, and added, “But great work, everyone.”
The S Team was working together more smoothly now. Familiarity had bred trust and apparently quelled the acrimony among the Amazon managers. Bezos had at this point worked with executives like Jeff Wilke, Jeff Blackburn, Diego Piacentini, chief financial officer Tom Szkutak, and general counsel Michelle Wilson for the better part of a decade.
But one beloved S Team member was no longer with the company. At an all-hands meeting at the Moore Theater in November of 2007, Jeff Bezos announced to employees that Rick Dalzell, his longtime right-hand man, was retiring. The senior manager of the company’s engineers, Dalzell had been trying to exit for a while.
He was fifty years old, he had gained weight,
and he was ready to spend more time with his family. After Bezos made the announcement, the two men got emotional and embraced onstage. On Dalzell’s last day at work, his colleagues threw him a low-key going-away party at Jillian’s bar in South Lake Union.
Four months later, enjoying retirement, Dalzell decided to visit his daughter in college in Oregon. His wife chartered a private plane for her husband, herself, and Dalzell’s parents. Strangely, their driver took them not to their usual airport but to a private airfield down the street from Boeing Field. Dalzell finally started to notice something was amiss when the car pulled up to a familiar hangar sheltering a Dassault Falcon. When he walked into the airplane, he found it full of friends, colleagues, and Jeff Bezos, all of whom shouted, “Surprise!” They were going to Hawaii for a gala given in appreciation of Dalzell’s longtime service, just like the Shelebration for Shel Kaphan nine years before. Bezos and MacKenzie invited Andy Jassy and his wife, former colleague Bruce Jones, and a bunch of Dalzell’s family friends and army buddies.
They stayed in bungalows on a beach in Kona. Butlers were on call, and a sushi chef appeared at four o’clock every afternoon. Lengthy toasts were proffered over dinners, and one day they took an aerial tour of Volcanoes National Park, but in the jet, not a helicopter. “Jeff’s not a helicopter guy anymore,” says Bruce Jones.
Bezos worked his subordinates to exhaustion, supplied little in the way of corporate creature comforts, and allowed many key personnel to leave without showing any remorse. But he was also capable of deeply gracious and unexpected expressions of appreciation. Dalzell had performed heroically for a decade and kept the company on track in the gloomy days when the infrastructure was a mess and Google was poaching every other engineer.
